CONTRACT FORMATION + BATTLE OF THE FORMS
John showed his friend Mary his new gas grill. She asked him if he would be interested in selling his old charcoal grill. “I’m not interested in selling it,” he replied, “but I would be happy to trade it for that old lawn mower you said you wanted to get rid of.” Mary, said, “It’s a deal!” Did John and Mary enter into an Article 2 transaction?
A. No, because neither of them is a merchant.
B. No, because the transaction did not involve the sale of goods.
C. Yes, because they entered into a transaction in goods.
D. Yes, because they made the exchange in the present rather than agreeing to make it in the future.
Correct Answer:C
Article 2 applies to “transactions in goods.” This is a barter transaction, where the price is paid in goods rather than money, but it is still an Article 2 transaction. See § 2-304(1). Therefore, response C is the correct response. As we will see in Chapter 4.A, both the charcoal grill and the lawn mower are “goods” as defined in Article 2, so response B is incorrect. As we saw in Chapter 2.A, as long as the transaction involves goods, it does not matter whether the parties are merchants or not, so response A is incorrect. Article 2 covers both present contracts and future contracts, so response D is incorrect.
John and Mary agreed on the telephone that John would buy Mary’s Ted Williams autographed baseball for $400. Mary later told him, “Ha, Ha. I got a better offer for that ball, and all I had with you was a verbal agreement, so that doesn’t count.” Is there an enforceable contract between John and Mary?
A. Yes, because oral agreements for the sale of goods for less than $500 are enforceable.
B. Yes, because the UCC does not apply to this agreement because John and Mary are not merchants.
C. Yes, because Mary admitted making the agreement.
D. No, because there is no writing signed by Mary.
Correct Answer:A
Of course, we know that Mary meant to say, “all I had with you was an oral agreement.” Because this is a transaction in goods, the UCC applies. Under § 2-201(1), this agreement does not need to be evidenced by a writing because it is not “a contract for the sale of goods for the price of $500 or more.” Therefore, response A is correct.
A producer of cherries offers his crop to a fruit wholesaler. The producer shows the wholesaler sample cherries from his crop and, in a written agreement, the wholesaler agrees to buy the entire cherry crop for a certain price. When the cherries arrive, most of them are less plump and less ripe than the ones the producer had shown to the wholesaler. Does the wholesaler have a claim for breach of warranty?
A. Yes, because the producer told the wholesaler the cherries would be plump and ripe.
B. Yes, because the sample created an express warranty that the goods would conform to that sample.
C. No, because no warranty was in writing.
D. No, because the wholesaler bore the risk that the goods did not conform to the sample.
Correct Answer:B
This is a good example of how express warranties may be created. When the seller shows the buyer a sample, he is in effect promising that the goods will conform to the sample. Section 2-313(1)(c) provides: (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
An American importer contracted to buy 100 cases of wine from a German seller. The buyer agreed to pay for shipping. The seller arranged for shipment by ship from the port of Hamburg to the port of Wilmington, North Carolina, where the buyer was to receive it, but the seller did not notify the buyer. The ship sank en route and the buyer never received the wine. Which party is responsible for the risk of loss?
A. The seller, because this was a destination contract.
B. The seller, because even though this was a shipment contract, the seller failed to notify the buyer of the shipment.
C. The buyer, because this was a shipment contract.
D. The buyer, because it agreed to pay for shipping.
Correct Answer:B
This was a shipment contract, because the seller agreed only to deliver the goods to the port and not to the buyer. In a shipment contract, according to § 2-509, “the risk of loss passes to the buyer when the goods are duly delivered to the carrier.” Normally, therefore, the risk of loss would be on the buyer in this situation. However, the seller did not notify the buyer as required by § 2-504(c). Although failure to give notice is not material in all circumstances, under these facts, a court held that the risk of loss was on the seller. It stated, “The requirement of prompt notification by the seller, as used in [§ 2-504(c)], must be construed as taking into consideration the need of a buyer to be informed of the shipment in sufficient time for him to take action to protect himself from the risk of damage to or loss of the goods while in transit.” See Rheinberg-Kellerei GMBH v. Vineyard Wine Co., Inc., 281 S.E.2d 425 (N.C. App. 1981).
John sees a TV commercial in which a certain car is driven across a shallow stream to get to a good fishing spot. He buys the car from the local dealership. A few days later, he drives the car across a stream and the engine is flooded and severely damaged. He brings a claim for breach of warranty against the manufacturer. What advice could you give him about this claim?
A. In some jurisdictions, a claim for breach of implied warranty can be brought by a remote purchaser.
B. He is out of luck because he is not in privity of contract with the manufacturer.
C. In some jurisdictions, a claim for breach of express warranty can be brought by a remote purchaser.
D. Amended Article 2 specifically recognizes this claim.
Correct Answer:C
Although response D is correct, it is not the best answer. Amended Article 2 has not been enacted in any jurisdiction, so even though the advice is accurate, it will do the client little good. Response B is not a good response because the modern trend is away from a requirement of privity of contract. Although both responses A and C are correct, the content of the television advertisement would be an express warranty rather than an implied warranty, so C is the best response. Note that the claim is for property damage, however, so some jurisdictions that allow claims by remote purchasers against manufacturers might not allow it since it does not involve personal injury.
A borrower goes to a lender to borrow money. The lender says, “We will lend you $5,000 if you promise to pay it back with interest. In addition, you will have to turn over the title to your car to us. If you default on your payments, then we may keep the title to your car.” The borrower agrees and a contract is drawn up containing these terms. Is this an Article 2 transaction?
A. Yes, because there is a present passing of title to the car.
B. Yes, because there may be a future passing of title to the car.
C. No, because there is no contract for sale.
D. No, because a car is not goods.
Correct Answer:C
Even though title to the car is transferred, it is not transferred from a seller to a buyer. That is, the purpose of the transaction is not to sell the car. The purpose of the transaction is to create a security interest in the car so that it secures the loan. Part of § 2-102 that we did not examine provides:
[Article 2] does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
If a person transfers ownership only for purposes of security, it is not an Article 2 transaction.
State the elements of the merchant confirmation exception under UCC § 2-201(2).
A car dealer sells a used car with 50,000 miles on it to a buyer. Shortly thereafter, the transmission fails. Did the seller breach the implied warranty of merchantability?
A. No, because used car dealers don’t give a warranty of merchantability.
B. No, because the implied warranty of merchantability is not given in the sale of used goods.
C. Yes, because the seller has impliedly promised that the car will function properly.
D. It depends whether an automobile transmission is ordinarily fit to last more than 50,000 miles.
Correct Answer:D
A merchant seller gives an implied warranty of merchantability when it sells goods, and it does not matter that the goods are used. Therefore, responses A and B cannot be correct. However, the warranty does not promise that the goods will perform perfectly. It promises only that the goods “are fit for the ordinary purposes for which such goods are used.” So we would have to determine whether the car is fit for the purposes of a vehicle that has 50,000 miles on it.
A seller sells 100 type-A widgets to a buyer and agrees to arrange for shipping to the buyer at the buyer’s expense. The seller notifies the buyer that the goods have been shipped. While the goods are en route, they are hijacked and never found. As between the seller and the buyer, who is responsible for the loss?
A. The seller, because this was a destination contract.
B. The seller, because it was negligent in choosing the carrier.
C. The buyer, because the risk of loss passed when the goods were delivered to the carrier.
D. The buyer, because the shipment was at the buyer’s expense.
Correct Answer: C
This is a shipment contract. Notice that the mere fact that the seller has arranged for shipment to the buyer does not make it a destination contract. Obviously, every shipping contract has to have a destination. In a shipment contract, under § 2-509(1)(a), “the risk of loss passes to the buyer when the goods are duly delivered to the carrier.”
When does an intended third-party beneficiary acquire enforceable rights?
(1) The contract intends to benefit the third party, AND (2) the third party’s rights vest.
Buyer sends Seller a purchase order for industrial equipment. Seller responds with an acknowledgment form stating: “Acceptance is expressly conditional on Buyer’s assent to the additional and different terms contained herein.”
The forms contain conflicting arbitration clauses. Neither party expressly agrees to the other’s terms, but Seller ships the equipment and Buyer accepts and pays for it.
Which of the following is the MOST accurate statement?
A. No contract exists because the writings contained different terms.
B. A contract was formed under UCC § 2-207(1), and Seller’s terms control because Seller sent the final form.
C. A contract was formed by conduct under UCC § 2-207(3), and the conflicting arbitration clauses are knocked out and replaced by UCC gap-fillers.
D. A contract was formed under the common law mirror-image rule because performance cures all conflicting terms.
Correct Answer: C
Seller’s response was expressly conditional on assent to the new terms, so no contract formed under UCC § 2-207(1).
However, the parties’ conduct (shipment, acceptance, payment) recognizes the existence of a contract under UCC § 2-207(3).
Under § 2-207(3): (1) the contract includes only agreed terms, (2) conflicting terms are excluded, and (3) UCC gap-fillers apply.
On a Friday, a customer who rarely purchased art walked into an art gallery and saw a painting displayed that he liked. He said to the manager, “I’ll give you $5,000 for that painting.” The manager said, “It’s a deal.” The customer then explained that he would return with the money on Monday and the manager said, “That won’t be a problem. I’ll hold the painting for you in the back.” The customer then said, “Not that I don’t trust you, but I’m going to confirm our deal so there is some evidence of it.” He wrote on a piece of paper, “John Smith agreed to purchase the Picasso painting La Reve from the Gilderson Gallery on March 1.” He signed the paper and handed it to the manager. When the customer returned on Monday with the money, the manager apologetically explained that the painting had inadvertently been sold to someone else. The customer insisted that they had an enforceable contract. Did they?
A. No, because the confirmation was not sufficient.
B. No, because both parties were not merchants.
C. Yes, because there was a writing signed by the party against whom enforcement is sought.
D. Yes, because there is a confirmation that was sufficient.
Correct Answer: B
Under subsection (1), there is not a writing signed by the art gallery, which is the party against whom enforcement is sought. Is the gallery bound under the confirmation exception? The confirmation here sufficiently described the transaction. The price was missing, but that can be supplied by evidence of the commercial setting in which the transaction was made. The problem is that the purchaser is not a merchant. Therefore, subsection (2) is not satisfied. The best response is B.
Consumer purchases a used commercial freezer from Merchant Seller. The written contract states in standard-sized text: “Seller makes no guarantees regarding this product.”
The contract contains no other disclaimer language. After purchase, the freezer repeatedly malfunctions during ordinary use. Consumer sues for breach of the implied warranty of merchantability.
Which of the following is the STRONGEST argument for Consumer?
A. The disclaimer is ineffective because disclaimers of implied warranties must always be oral.
B. The disclaimer is ineffective because it failed to specifically mention merchantability.
C. The disclaimer is ineffective because implied warranties cannot be disclaimed in consumer transactions.
D. The disclaimer is ineffective because used goods cannot be sold without warranties.
Correct Answer: B
Under UCC § 2-316, to disclaim the implied warranty of merchantability: (1) the disclaimer must specifically mention “merchantability,” and (2) if written, it must be conspicuous.
The language “Seller makes no guarantees” is insufficient because it does not specifically reference merchantability.
A seller sells 100 type-A widgets to a buyer and agrees to arrange for shipping to the buyer at its own (the seller’s) expense. The seller notifies the buyer that the goods have been shipped. The seller inadvertently loaded 100 type-B widgets. While the goods are en route, they are hijacked and never found. As between the seller and the buyer, who is responsible for the loss?
A. The seller, because its agreement to pay for the shipping made this a destination contract.
B. The seller, because the goods did not conform to the contract.
C. The buyer, because the risk of loss passed when the goods were delivered to the carrier.
D. The buyer, because it had a reasonable opportunity to obtain insurance after it was notified of the shipment.
Correct Answer:B
This is still a shipment contract. The fact that the seller has agreed to pay for shipping means just that, and does not alter the risk of loss. As a general rule, in a shipment contract, under § 2-509(1)(a) “the risk of loss passes to the buyer when the goods are duly delivered to the carrier.” However, the general rule is subject to an exception under § 2-510(1): “Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.” Here, the seller shipped goods that did not conform to the contract. Therefore, the risk of loss remained on the seller during shipment.
Owner contracts with Painter to paint Owner’s office building. Neighbor claims the newly painted building will increase traffic to Neighbor’s coffee shop and sues Painter for breach when Painter fails to perform.
Which of the following is the BEST argument against Neighbor’s claim?
A. Neighbor cannot sue because only parties to the contract may ever sue for breach.
B. Neighbor is merely an incidental beneficiary and therefore lacks enforcement rights.
C. Neighbor’s rights never vested because Neighbor did not rely on the contract.
D. Neighbor may sue because any person who benefits economically from a contract is an intended beneficiary.
Correct Answer: B
An incidental beneficiary receives only an indirect or unintended benefit from the agreement and has no enforcement rights.
The painting contract was intended to benefit Owner, not Neighbor.
Merchant Buyer sends Merchant Seller a purchase order for computer components. Seller sends a written acknowledgment accepting the order but adding a clause disclaiming all liability for consequential damages arising from defective goods. Buyer never objects. The goods are shipped and accepted.
If litigation arises over defective goods causing major business interruption losses, which of the following is the BEST argument for Buyer?
A. The consequential damages disclaimer became part of the contract because Buyer failed to object.
B. The disclaimer became part of the contract because additional terms between merchants automatically become part of the agreement.
C. The disclaimer did not become part of the contract because it materially altered the agreement by causing unreasonable surprise or hardship.
D. The disclaimer controls because Seller’s acknowledgment form was sent after Buyer’s purchase order.
Correct Answer: C
Under UCC § 2-207(2), between merchants, additional terms become part of the contract UNLESS: (1) the offer limits acceptance, (2) objection is made, or (3) the term materially alters the agreement.
A clause disclaiming consequential damages can materially alter the contract because it may create unreasonable surprise or hardship.
Luxury Retailer orally agrees to purchase 2,000 winter coats from Designer for resale during an upcoming national advertising campaign. The coats are to contain Retailer’s stitched corporate logo, custom sizing specifications unique to Retailer’s customer base, and proprietary interior labeling identifying the campaign. After the agreement, Designer purchases rare imported fabric, hires additional workers, and completes 30% of production. Before delivery, Retailer repudiates the agreement and argues the contract is barred by the Statute of Frauds because no signed writing exists.
Designer sues to enforce the agreement.
Which of the following is the STRONGEST argument for Designer?
A. The agreement is enforceable because Designer materially changed position in reliance on the oral agreement.
B. The agreement is enforceable because the coats were identified to the contract once production began.
C. The agreement is enforceable because the coats were specially manufactured, not suitable for ordinary resale, and Designer made substantial commitments before repudiation.
D. The agreement is enforceable because beginning manufacture alone removes an oral agreement from the Statute of Frauds.
Correct Answer: C
Under UCC § 2-201(3)(a), the specially manufactured goods exception applies.
The custom logos, proprietary labeling, and unique sizing strongly suggest the coats are not reasonably marketable to others. Designer also made substantial commitments by purchasing rare fabric, hiring workers, and partially completing production before repudiation.
Manufacturer sells Buyer industrial refrigeration equipment. The contract limits Buyer’s remedy exclusively to repair or replacement of defective parts and excludes consequential damages. Over the next year, the equipment repeatedly malfunctions, causing significant production shutdowns. Manufacturer attempts repairs six separate times, but the defects continue and the equipment never operates properly for more than a few days at a time.
Buyer sues seeking full UCC remedies.
Which of the following is the BEST argument for Buyer?
A. The exclusive remedy automatically fails whenever a product requires multiple repairs.
B. The exclusive remedy failed of its essential purpose because repeated ineffective repairs deprived Buyer of the substantial value of the bargain.
C. The consequential damages exclusion automatically becomes unconscionable once the product malfunctions.
D. The exclusive remedy fails because all limitations of remedies are prohibited in commercial contracts.
Correct Answer: B
Under UCC § 2-719(2), an exclusive remedy fails of its essential purpose where: (1) Buyer gives Seller a reasonable opportunity to cure, (2) Seller repeatedly fails to repair effectively, and (3) Buyer is deprived of the substantial value of the bargain.
The repeated failed repairs here strongly support failure of essential purpose.
Owner agrees to sell a rare guitar to Fraudster in exchange for a check. Fraudster takes possession of the guitar, but the check later bounces. Fraudster then sells the guitar to Buyer, who purchases in good faith and without knowledge of the fraud.
Owner sues Buyer to recover the guitar.
Who is MOST likely to prevail?
A. Owner, because Fraudster acquired void title and could not transfer good title.
B. Owner, because bounced checks automatically prevent transfer of title under Article 2.
C. Buyer, because Fraudster acquired voidable title and transferred good title to a good faith purchaser for value.
D. Buyer, because all purchasers from merchants automatically obtain good title.
Correct Answer: C
Explanation
Under UCC § 2-403(1): (1) where the owner voluntarily transfers possession, (2) even if induced by fraud or a bad check, (3) the transferee obtains voidable title.
A person with voidable title can transfer good title to a Good Faith Purchaser for Value (GFPV).
Owner voluntarily transferred the guitar and Buyer acted in good faith, Buyer prevails.
General Contractor contracts with Supplier to deliver custom windows for construction of Homeowner’s house. The agreement expressly states the windows are “for the benefit of Homeowner.” Before delivery occurs, Contractor and Supplier mutually agree to substitute lower-grade windows. Homeowner objects and sues.
Which fact MOST strongly supports Homeowner’s argument that Contractor and Supplier could NOT modify the agreement without Homeowner’s consent?
A. Homeowner was aware of the contract before modification.
B. Homeowner was an incidental beneficiary of the agreement.
C. Homeowner materially relied on the original promise before modification.
D. Supplier had already partially performed before modification.
Correct Answer: C
An intended beneficiary’s rights vest when the beneficiary: (1) Materially relies on the promise, (2) Manifests assent, or (3) sues on the contract.
Once rights vest, the original parties generally cannot modify the contract without the beneficiary’s consent.
Manufacturer sends Supplier a purchase order for industrial machinery parts stating: “Any disputes arising under this agreement shall be litigated exclusively in New Jersey courts.”
Supplier responds with an acknowledgment form stating: “All disputes shall be resolved exclusively through binding arbitration in Delaware.”
Both parties are merchants. Neither party objects to the other’s form. Supplier ships the goods, Manufacturer accepts them, and a dispute later arises.
Under the MAJORITY approach to UCC § 2-207, which of the following is the MOST accurate result?
A. Supplier’s arbitration clause controls because the acknowledgment form was the last form exchanged before performance.
B. Manufacturer’s litigation clause controls because terms contained in the original offer govern conflicting terms.
C. Both dispute-resolution provisions become part of the contract because merchants are presumed to accept additional terms unless objection is made.
D. The conflicting dispute-resolution provisions knock each other out, and the court supplies the governing law through UCC gap-fillers and applicable procedural law.
Correct Answer: D
This is a classic “different terms” problem under UCC § 2-207 because the forms directly conflict.
Litigation in New Jersey courts vs. Arbitration in Delaware.
Under the MAJORITY knock-out rule: (1) Directly conflicting terms cancel each other out, (2) Neither party’s clause controls, and (3) the court applies UCC gap-fillers/default legal principles.
Distributor orally agrees to purchase 20,000 glass containers from Supplier. Supplier delivers 5,000 containers, which Distributor accepts and pays for. Supplier later delivers another 5,000 containers, which Distributor receives but immediately rejects as defective. No signed writing exists. Supplier sues to enforce the entire oral agreement.
Which of the following is the MOST accurate statement regarding the Statute of Frauds?
A. The entire agreement is enforceable because part performance validates the whole contract.
B. The agreement is enforceable only for the first 5,000 containers because those goods were accepted and paid for.
C. The agreement is enforceable for 10,000 containers because Distributor physically received both shipments.
D. The contract is entirely unenforceable because there is no signed writing satisfying the Statute of Frauds.
Correct Answer: B
Explanation
Under UCC § 2-201(3)(c), the part performance exception validates an oral contract ONLY to the extent goods are: (1) accepted; OR (2) paid for.
The first 5,000 containers qualify because Distributor accepted and paid for them.
The second shipment does not qualify because the goods were rejected.
Thus, only the first 5,000 containers are enforceable under the exception.
Retailer purchases industrial ovens from Manufacturer. The ovens begin malfunctioning shortly after installation, causing repeated production interruptions. Retailer internally documents the problems for eight months but never communicates with Manufacturer. Retailer then files suit for breach of implied warranty of merchantability seeking lost profits and repair costs.
Manufacturer argues Retailer’s claims are barred.
Which of the following is the MOST accurate statement?
A. Retailer may proceed because filing the lawsuit itself satisfies the notice requirement.
B. Retailer’s claims are barred because Buyer failed to notify Seller of the alleged breach within a reasonable time after discovery.
C. Retailer may proceed because notice is required only in consumer transactions.
D. Retailer’s claims are barred only if Manufacturer proves actual prejudice from the delayed notice.
Correct Answer: B
Under UCC § 2-607(3)(a), a buyer must: (1) Discover or have reason to discover the breach, (2) Notify the seller, and (3) within a reasonable time.
Failure to provide reasonable notice bars warranty remedies.
Retailer waited eight months while documenting the defects internally without notifying Manufacturer, strongly supporting Manufacturer’s defense.
Collector leaves a vintage Rolex watch with Jeweler for repair. Jeweler, who regularly sells luxury watches, wrongfully sells the watch to Customer during normal business hours from the showroom display case. Customer pays market value, has no knowledge of Collector’s ownership, and believes the sale is legitimate.
Collector later sues Customer to recover the watch.
Which of the following is the MOST accurate result?
A. Collector prevails because Jeweler never had actual ownership of the watch.
B. Collector prevails because entrustment applies only to consignment arrangements.
C. Customer prevails because Collector entrusted the watch to a merchant dealing in goods of that kind, and Customer was a buyer in ordinary course of business.
D. Customer prevails only if Jeweler expressly informed Customer that the watch belonged to Collector.
Correct Answer: C
Under UCC § 2-403(2), entrustment applies where: (1) owner voluntarily entrusts possession, (2) to a merchant dealing in goods of that kind, and (3) goods are sold to a Buyer in Ordinary Course of Business (BIOC).
Entrustment includes: (1) delivery for repair, (2) consignment, or (3) other voluntary transfers of possession.
Customer: (1) bought in good faith, (2) without knowledge of ownership problems, (3) in an ordinary retail transaction.
Thus, Customer obtains good title and Collector loses the watch.
Debtor owes Creditor $50,000. Debtor later contracts with Investor, under which Investor promises to pay Creditor directly in exchange for Debtor transferring valuable equipment to Investor. Investor later refuses to pay Creditor.
Which of the following is the MOST accurate statement?
A. Creditor is an incidental beneficiary because Creditor was not a party to the contract.
B. Creditor cannot sue because only Debtor provided consideration.
C. Creditor is an intended creditor beneficiary and may sue Investor directly.
D. Creditor may sue only if Debtor first sues Investor for breach.
Correct Answer: C
A creditor beneficiary exists where: performance of the promise satisfies an obligation owed to the third party.
Investor promised to pay Creditor directly to satisfy Debtor’s preexisting debt.
Thus, Creditor is an intended creditor beneficiary with direct enforcement rights against Investor.